Roll early to grab Crossover positive skew, says Barcap

Looking forward to the iTraxx series 12 roll, Barclays Capital analysts argue that investors should focus on skew, liquidity, curves, and fundamentals in order to exit from series 11 and enter series 12 as profitably as possible.

With standardised coupons, analysts expect the series 12 Crossover to initially trade with a large positive skew, but not beyond 25 basis points. If the new indices have a much larger skew than the current ones, the shorts should roll later than longs.

Liquidity is a major concern in the HiVol when compared to the main index, which has historically tended to remain liquid subsequent to the roll. Furthermore, liquidity should be greater in the on-the-run Crossover, and deteriorate in series 11. Analysts thus recommend rolling earlier rather than later, especially with series 12 having more constituents.

Analysts do not expect curve volatility for the current roll, as there is only a small maturity gap between the two series.

Finally, fundamentals are a minor concern in Crossover given that the new series will include four triple-C rated credits, resulting in a default probability of 17.4% from 17.2% in series 11.